Sit back and let the markets rule the world… That was the overarching philosophy of the pre-financial-crash days. The markets always knew best and performed best without interference from regulators, but in 2008 those markets exploded. Now, 11 years later, societies are still trying to cope with the consequences of the crash. Wage stagnation, asset inflation, populism, ultra-low interest rates, growing discontent with elites, distrust of financiers, rising intra-state inequality, and even Brexit have been pinned on that crisis. Regulatory action was inevitable. The time to sit back and let the markets rule is officially over.
The response has been significant. In 2008 there were around 9,000 regulatory alerts of interest to financial companies, according to data from Thomson Reuters. By 2017, this number had risen to 56,000: a six-fold increase. The Markets in Financial Instruments Directive (Mifid II) – one of the EU's prize pieces of regulation – contains 30,000 pages and 1.4 million paragraphs. It is one of the largest pieces of regulation in the history of humanity.
However, what have the new rules actually achieved? Are financial markets more robust because of them? Is the world a safer and fairer place? Has the increase in capital and liquidity requirements, ring-fencing, and stress testing enhanced resilience? Which areas have been overlooked? Is it even possible to address the psychological factors of a crisis scenario? And how about the impact of fragmentation? In a globalised, interconnected world, systemic risk knows no bounds, but regulations frequently stop where national borders end. Notable discrepancies exist between EU regulation and the US's Dodd-Frank Act.
There are no easy answers to these questions. That's why IFLR Practice Insight has been busy interviewing regulators, fund managers, consultants, bankers, academics, and politicians over the last six months. The result is a five-part article series that evaluates the accumulative impact and effectiveness of the regulatory response to the financial crash.
The report, published over five consecutive weeks, breaks down as follows:
- Part one: transparency
- Part two: conduct and culture
- Part three: fragmentation
- Part four: competition
- Part five: potential sources of future crisis and universal safeguards
Our aim is to provide a constructive space for dialogue between markets and regulators. Our method has been holistic as possible. As far as we are aware, this is the first independent journalistic attempt to evaluate post-crisis reforms comprehensively. We are excited to share the findings with the readers of Practice Insight. Expect bigger picture angles and an exploration of unintended consequences.
The first part is scheduled for publication on September 12.
As the world teeters on the brink of Brexit instability and a possible recession, we think this is a timely moment to review the new regulatory regimes.